Shifts in

Supply & Demand

Supply and demand curves are meant to be visual representations of the behavior of buyers and sellers and therefore we should expect anything affecting behavior will be reflected in the supply and demand curves.  A shift in one of the curves will take place whenever there is an event which alters one or more of the determinants of behavior. 

Note: a shift in the supply or demand curves would not be the result of a change in the price since the slope captures the impact of price on supply and demand and we will discuss this relationship in the section on slope.  You should be careful here because experience clearly shows students often mess things up by shifting the wrong curve or two curves when only one shift is called for. The only time a curve shifts is when a change in some factor OTHER THAN PRICE affects the behavior of either buyers or sellers. For example, when there is a freeze in Florida this will directly influence suppliers.  They are the ones who lose their product so we should expect to see a decrease in supply that shifts the supply curve inward. You, as a buyer of orange juice, do not lose any sleep over the freeze and  your interest in orange juice does not change.  In fact I doubt you even know about the freeze.  What this means is the freeze does not change your behavior and the demand curve does not shift.   You will be affected by the freeze because the new intersection of the S & D curves is higher indicating you will pay more, but this is already shown on the existing demand curve. 

Returning to our RIU example, we would expect the demand for seats at RIU to be affected by a substantial decrease in the tuition rates at another school, while we would expect the number of seats supplied would be affected if there was a substantial decrease in state support for the school.  We will now examine how we would represent graphically these shifts in supply and demand. 

I. Demand Shifts

Increase in Demand: we represent an increase in demand by an outward shift in the curve (from D1 to D2). In the graph below at the price p1, demand has increased from Q1 to Q2. At every price there will be a greater demand than there was before the 'shock' of increased demand. We could expect this to describe the effect of an increase in income or an increase in the size of potential demanders.  In the case of RIU, we would expect to see the demand shift out if the tuition rate at another college were raised substantially, if the economy was expanding rapidly and families had more income to spend on education, or if high school grads were having real problems finding jobs.

Decrease in Demand: we represent a decrease in demand by an inward shift in the curve (from D1 to D2). In the graph below at p1, demand has decreased from Q1 to Q2. At every price there will be a less demand than there was before the 'shock' of decreased demand. We could expect this to describe the effect of a decrease in the price of a substitute good. In the case of RIU, we would expect to see the demand curve shift inward if tuition rates at another college were lowered substantially, if the economy was falling into a recession and families had less income to spend on education, or if high school grads were finding jobs quite easily.

II. Supply Shifts

Increase in Supply: we represent an increase in supply by an outward shift in the curve (from S1 to S2). In the graph below at P1, the amount sellers are willing to supply has increased from Q1 to Q2. At every price there will be a greater supply than there was before the 'shock' of increased supply. We could expect this to describe the effect of an increase in the productivity of the production process. In the case of RIU, we would expect to see the supply shift out if the costs of running the university fell substantially or the average class size rose.

Decrease in Supply: we represent a decrease in supply by an inward shift in the curve (from S1 to S2). In the graph below we see at p1, the amount sellers are willing to supply has decreased from Q2 to Q1. At every price there will be a less supply than there was before the 'shock' of decreased supply. We could expect this to describe the effect of an increase in the price of a resource used in production. In the case of RIU, we would expect to see the supply shift in if the costs of running the university rose substantially or average class size fell.